Water under the bridge
British project provides pointers
John Chenery talks with Sir
When the Thatcher government decided to privatize the water industry in
England and Wales in 1988, it unleashed a storm of public criticism that
has only recently started to subside. At the centre of the storm was Sir
Ian Byatt, whose Office of Water Services (OFWAT) was responsible for
overseeing water pricing, service and efficiency. Sir Ian stepped down as
Director General of Water Services last year and earlier this year
completed an extensive review of local government procurement in England
called Delivering Better Services for Citizens. When visiting Toronto
recently, he spoke to Summit about why he believes governments throughout
the world will continue to relinquish service delivery to the private
Summit: All levels of government in Canada are
looking to the private sector to provide services that were once
government responsibilities. Are there any aspects of the British
privatization model that can be applied here?
Byatt: What happens in a particular situation depends on the
institutional setting, history and prevailing attitudes. But some general
lessons have come out of the UK experience. One is accountability and
responsibility - deciding who's going to do what. In water, for example,
it is clear that setting standards - drinking water quality and how
wastewater is treated - is a job for [government] ministers who are
democratically accountable, in our case within the European Union. We
established quality regulators to ensure that companies meet those
standards through a system of inspections and enforcement. OFWAT ensured
that the companies carried out their business functions, setting price
limits that enabled them to finance themselves, promoting efficiency and
protecting customers. The clarity of who does what is important. Another
lesson is the need for transparency. Instead of decisions being taken
behind closed doors, everything is in the public domain. We've published
huge amounts of information about the water industry so that people
putting forward their point of view did so on an informed basis. We also
learned that through privatization it was possible to achieve new, higher
standards of drinking water quality and wastewater treatment and still
make dramatic progress in efficiency and cost reduction.
Summit: During the changeover and for some
time afterwards, there was intense criticism of the privatization process,
of the water companies and of OFWAT.
Byatt: Nothing is ever achieved without criticism. What worried people
initially was that in the first few years water prices went up quite
significantly. That was necessary to finance the huge increase in the
capital program. Investment in the industry doubled from about £1.5
billion to £3 billion a year and has remained fairly steady at that level
since about 1990. That was bound to push bills up. More recently, we've
seen the results of efficiency improvements and in 2000 were able to
reduce bills by about 12 percent.
Summit: Speaking about transparency: it was
within your power to make OFWAT's operations transparent, but didn't the
water companies resist pressure to reveal confidential corporate
Byatt: The companies had to declare a lot of information to us. We took
care to ensure that this was collected consistently across the country [to
evaluate performance]. That information is publicly available. We publish
summaries in our reports - also freely available - and we put all the
basic data on a CD-ROM, for anyone who wants detailed information about
the companies. [All this information] has helped in promoting an
understanding of how environmental improvements, desirable though they may
be, cost money. By demonstrating the cost and how this affects water
bills, we've been able to encourage people to think in a cost-effective
Summit: Some critics of privatization
suggested that OFWAT should have been more involved with the environmental
aspects of water supply and wastewater disposal so that these could be
included in its pricing deliberations.
Byatt: We were involved; not by having environmental responsibilities
ourselves but by having a process whereby we took account of these issues.
Each time we had a price review, I would write to the Secretary of State
[for environment] describing possible environmental improvements and how
much they would add to water bills and requesting information on new
environmental obligations water companies would face during the next five
years so that I could allow for these expenditures in setting prices.
Ministers would reply in public. This open dialogue finished with
[government] setting out the new environmental obligations. My job was to
protect customers and to keep them from paying too much and to protect
them against having to pay for obligations that were not cost-effective. A
minister, advised by me on costs and by the environmental agency on
benefits, decided what those obligations would be.
Summit: In your opinion, how much money is
reasonable for a water company to make?
Byatt: We believe that an average return on capital of about five
percent above the rate of inflation is reasonable over the medium term. We
would set price limits for five years after applying our own efficiency
factors to their projections, taking account of the costs of new
obligations (not just relying on water company numbers, but adjusting them
for the efficiencies we believed they could achieve) and then allowing a
rate of return of about five per cent over that whole period. Some years
they may make more, some years less. Indeed, if they could reduce their
costs even further then they might make considerably more but in the next
price review we hand those benefits over to the customer.
Summit: A lot of the water company projections
regarding their investment in infrastructure didn't really pan out. Why
was that? How did OFWAT deal with it?
Byatt: We realized that there was a tendency to overbid. In both price
reviews we took a hard look at their capital expenditure estimates and
concluded that they could fulfill their obligations with substantially
less expenditure, both capital and current. What happened between 1995 and
2000 was interesting. We cut back their estimates and they did even better
than projected, so there was some unexpected efficiency coming from the
system - part of the reason we were able to introduce substantial price
reductions in 2000.
Summit: Has privatization produced the level
of investment in infrastructure that you thought was necessary at the
Byatt: I don't know that I had a figure in my head that I thought was
necessary. We tried to think more in terms of obligations that had to be
achieved. The companies have achieved those obligations. Water quality has
improved considerably. We have fulfilled all European Community objectives
on wastewater, including much better beach quality. Of course that cost
money and investment has doubled, but we've achieved the objectives.
Summit: On the question of competition in the
UK water industry, critics claimed that from the consumer's point of view,
nothing much has changed; you have merely replaced several semi-public
water monopolies - the old regional water authorities - with private
Byatt: It's true that the kind of competition we've achieved in
electricity and gas has been slower coming in the case of water. However,
there has been some success. We were able to achieve capital market
competition. Each regional monopoly has to wash its face in the capital
market and the pressure from financial analysts to perform better by
getting costs down has been an important component of the increased
efficiency. Competitive pressures in the financial markets have been very
important. We encouraged the water companies to compete on customer
service by publishing how well they did in that area. We've shown that an
inefficient company can go out of business and be replaced by a more
efficient one without any affect on customers - no supply disruption, no
loss of water quality. But competition where the customer can choose a
water supplier has been slow coming. Big users can decide to go to another
company and prices for big water customers have come down. We believe that
the kind of common carriage that has developed in electricity and gas
could well develop in water, but there's a lot of work to do. Water is
very heavy stuff and there are special quality issues to deal with. All
the water companies must publish access codes. Anybody can use those pipes
to transfer water from one place to another. So the market is potentially
open, although no one has entered it yet.
Summit: What is going to happen when the
current 25-year water licences expire? Will there be a flood of new
companies wanting a piece of the action? How will that be handled?
Byatt: The government will have to decide what to do. They have to give
the companies 10 years' notice if they are proposing to have another
competition or introduce other changes. I presume that if the government
did want to make changes then a major consultation would determine the new
Summit: Are there a lot of international
companies waiting to get into the water business in Britain?
Byatt: Most of the big international water companies are operating
there now. Having a globalized water industry has, I believe, been an
advantage; you get different expertise coming from different places. I
wouldn't have believed 20 years ago that we could have a utility owned
Summit: How do you read the public view of
privatization now? Is it a fact of life or do some suspicions still
Byatt: I think it's now seen as a fact of life. It was quite unpopular
at the time because people couldn't understand that private profit was
compatible with public service. We've shown that it is. Water quality has
gone up, customer service has improved and now we've had a customer
dividend with the recent price reduction. The politics has not gone out of
water; politics will never go out of water, and it shouldn't, but
certainly the steam has subsided.
Summit: In Britain, privatization was one
element of a radical agenda driven somewhat forcefully by Mrs. Thatcher.
In the absence of similar political commitment in Canada, do you see any
factors that could move privatization and public-private partnerships into
the mainstream here?
Byatt: Part of the impetus in our case was the need to finance
improvement - catching up with past neglect and then meeting new standards
- both for drinking water and wastewater. I don't think that could have
been financed from the public sector. In some theoretical world it could,
but governments were not prepared to do that. The Labour government cut
water investment in the 1970s and investment remained low until the
private sector was brought in. Maybe - because of the state of government
finances and budgets - the only way to get higher standards is to use
private sector money. There are various ways to do that. We chose one
route but in Scotland they have taken water away from the municipalities
and put it into a public corporation using a private finance initiative to
get capital for improvements.
Summit: Why have governments in many countries
decided to get out of the business of borrowing money to finance
Byatt: In England it was a combination of two things: general pressure
on the budget with never enough public money and the realization that the
private sector is very good at raising money; and the belief that while it
was important that governments control what is produced, there is no need
for the government to produce everything. You can have very good public
control of outcomes without the government doing it all. Privatization in
its various forms is a way of achieving objectives more cost effectively.
Summit: Are there any areas that will always
be handled by government? Could the private sector, for example, deliver
health care in Britain?
Byatt: It depends what the people want, but it seems to me that the
essential role of government is to decide what needs to be delivered. I've
recently completed a report on local government procurement that concluded
that the job of the local authority is to decide what gets provided to
citizens, to make sure that it gets delivered and to maintain financial
control over that process. They don't have to do the delivery. That can be
outsourced in various ways. The public sector doesn't disappear; it
concentrates on the political issues, the outcome issues. Norwegian
patients now undergo surgery in Germany because there's a shortage of
doctors in Norway and a surplus in Germany. We're thinking about that in
England. But that's a delivery issue as opposed to a broader policy
question such as whether health care should be free at point of entry. The
people, through the electoral process, must decide those questions.
John Chenery has worked as a
journalist and editor for national newspapers in Australia and the UK.
Before moving to Toronto from Costa Rica, he was Director of
Communications with the Earth Council.